Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Tuesday, March 31, 2009

We do males and females choose different major subjects in college? This could be because of innate abilities or because of expectations about the prospect within a particular profession. For example, previous to college, girls have typically equal or better mathematics skills than boys, but they are noticeably under-represented in math intensive field in college, like sciences (excluding biology) and engineering. Could this be because female students somehow perceive that their prospects are better in social sciences and humanities?

Basit Zafar claims this is the case, based on a survey of second year students at Northwestern University, a survey that includes questions about expectations. This allows to understand the formation of preferences, not just choices. The short answer is that men care more about money and women look at non-pecuniary aspects. In other words, it looks like biology is still the important factor, and fighting it to force women into science against their will may not be the best thing. However, these results could also be interpreted that women do not want to get into certain fields because money does not buy happiness if (as a woman) you do not feel welcome. Engineering, for example, does not strike me as a field that has the reputation of welcoming women (rightly or wrongly).

On a side note, interesting to see that the Federal Reserve Bank of New York is interested in this kind of work.

Monday, March 30, 2009

Properly measuring income inequality is difficult, and not just because figuring out income from all sources is hard. The problem is that market income is not the relevant measure. So-called home production matters as well. When a spouse is not not getting a wage on the market but is providing services at home that have a market value, these services should be counted as income (and consumption). Of course, this is difficult to measure, so a short-hand trick could be to find how home production is related to market income.

One could expect home production to be negatively related to market income, because of the substitution of market time for home time. Harley Frazis and Jay Stewart find, however, a very weak correlation. They argue that one should rather treat home production like a constant. They come to this conclusion by using the American Time Use Survey, from which the value of home production can be estimated. Luckily, it also has income data. Frazis and Stewart use a flexible form (a Fourier series expansion) to allow any non-linearities to be captured.

This means that to accurately measure income inequality, one needs to add a constant, $8000 to $16000, depending on the type of household and whether secondary child care is included or not. This implies that trends in income inequality are not affected by home production, and we can continue to use market income for inequality analysis, as long as the composition of household types does not change.

Friday, March 27, 2009

The current stimulus spending package offers plenty of opportunities for pork-barrel, in fact one could even argue that it should be encouraged given the Keynesian policy to spend whatever the usefulness. This situation is, however, rather unique. Under "normal" times, do we observe periods of important pork-barrel spending, while there is little of it in others?

Marco Battaglini and Stephen Coate argue that there is a cycle of pork barrel spending that is correlated with public debt changes. Suppose there is a legislature with representative who care only about their district. When spending discipline is loose, they obtain a lot of pork. But once government debt reaches some level, fiscal discipline becomes predominant and pork spending is significantly reduced. Once the debt has become bearable again, porcine spending is in again. This argument seems rather simple and straightforward, so why would it be worthy of a publication in the American Economic Review?

It is in fact not straightforward to obtain such results. For example, it could be optimal for a government to accumulate assets to live off their interest. To avoid this scenario, one needs to have a legislature that does not behave like a social planner. Ways to do so include making representatives self-interested, or in the case of this paper, district-centered. Another reason to abandon districting (the first being gerrymandering).

Thursday, March 26, 2009

We generally think the swing voter is in the best of all worlds: he can choose policy at will, and the policy will fit exactly his desires. What could possibly disrupt this bliss? James Robinson and Ragnar Torvik argue that if the political climate is characterized by some level of repression or violence, the swing voters are going to be the first ones to suffer from it. Indeed, the policy makers in such environments do generally not like to make concessions.

Robinson and Torvik illustrate this with Zimbabwe, which is indeed too easy an example. Would their point also apply in less extreme situations? The critical aspect here is that violence is more effective on swing voters than opposition voters. The study here ignores that violence may radicalize opposition and in particular push swing voters into opposition. The big empirical questions thus becomes: are swing voters intimidated or radicalized?

Wednesday, March 25, 2009

In Economics, several journals are suspected of been biased in favor or faculty or graduates from their hoe institution. Among the top ones are the Journal of Political Economy (University of Chicago) and the Quarterly Journal of Economics (Harvard University). There has been so much gossip that there is really demand for a formal test whether editors exhibit such "home bias." Andrew Oswald sets out to do this, according to the abstract:

Science rests upon the reliability of peer review. This paper suggests a way to test for bias. It is able to avoid the fallacy – one seen in the popular press and the research literature – that to measure discrimination it is sufficient to study averages within two populations. The paper’s contribution is primarily methodological, but I apply it, as an illustration, to data from the field of economics. No scientific bias or favoritism is found (although the Journal of Political Economy discriminates against its own Chicago authors). The test’s methodology is applicable in most scholarly disciplines.

Unfortunately, the paper does not study peer review. It studies the order of articles in published issues, under the assumption that editors, if biased, would place home articles first. This is not the bias these journals are accused of. People have issues how these journals do not publish articles from others, and in particular how "desk rejects" (rejections that did not go through refereeing) are handled. And why would editors place better are articles first? As discussed recently on this blog, lead articles are not better.

This study is completely misleading because title and abstract discuss a research question that was not addressed in the paper. All those who do not read the paper will be mislead. Bad research.

Tuesday, March 24, 2009

There is a widespread belief that the housing market is closely linked to the business cycle. In particular, housing starts are a major component of the leading indicator index, meaning that housing start statistics tends to precede whatever happens to the business cycle. This belief is grounded on the analysis of national data. What about the local level?

Andra Ghent and Michael Owyang compare permits issued with labor market data in 26 US metropolitan areas. They find, after controlling for national effects, that the local housing markets are very poor predictors for local labor markets. The critical aspect here is to control for interest rates.

I learn from this that housing as a leading indicator should be considered with a grain of salt. But it is not quite clear to me what this means in terms of our understanding of the economy. The measure here is the number of permits issued. Is the reason this does not explain subsequent labor market outcomes that fluctuations in interest rates are really driving the execution of those permits, and thus the labor market?

Monday, March 23, 2009

With the advent of online bibliographic databases like RePEc and SSRN, with the increasing importance of readership statistics in the evaluation of a researcher, and with said evaluation becoming more and more competitive, it is obvious that some researchers will try to find ways to manipulate these statistics. There is plenty of anecdotal evidence that such manipulations are taking place successfully at SSRN, with self downloads and in particular teachers telling their classes to download their works. Some even use social forums like Fark or Facebook to ask total strangers to increase their counts. And it is common place to send emails to friends and family encouraging downloads. But that is only anecdotal evidence. Benjamin Edelman and Ian Larkin now provide better evidence that this is taking place. Their paper is on SSRN, so go and increase their download count...

Their strategy is to identify when in the career of a researcher increased downloads would matter and test whether they indeed increase at that time. Where most of the cheating is going on is with SSRN's "top ten" lists. There are many of those, and thus it is relatively easy to get on them, with a little help, especially when one is already close to the 10th position. Edelman and Larkin also find that one or two years before a career move, downloads "mysteriously" tend to increase. However, they find no evidence for approaching tenure decisions. But I think this underestimates the problem, as this study identifies fraud from the historical SSRN logs and how SSRN subsequently identified suspicious downloads according to its new rules. Those rules are very imperfect and thus obviously do not detect successful manipulation which anecdotal evidence shows is happening.

Fortunately in Economics, people do not rely on SSRN statistics, maybe because of this perception that they can be fraudulent (but SSRN claims to have cleaned up their act). RePEc statistics are followed much more closely, none the least because it is perceived as the "good guy" (whereas SSRN is profit seeking), because it has been open about its statistics from the start, because many safeguards have been put in place to prevent fraud from being successful, as explained on the RePEc blog post, and because downloads are not the only relevant metric. And in particular, RePEc does not insist on every page about its download statistics. And the fact that SSRN statistics are updated in real time is just too tempting (refresh a SSRN page to see what I mean).

Friday, March 20, 2009

Matching students to colleges in an optimal way is a very difficult task. This has been extensively studied, for example for medical interns where a mechanism was sought to prevent hospitals to grab the best students when they have barely started their studies. College admissions in the United States is a much larger market and universities, especially elite ones, have been playing strategic games by offering early admission programs with various conditions. The most current one is to have students apply early and get an early response against a binding commitment to attend if accepted. This leads potential students to act strategically in their applications, and it is widely believed that this is particularly detrimental to lower income students.

Ayse Mumcu and Ismail Saglam study this early admission market in the tradition of Gale and Shapley. In the first phase, it is a many-to-one early matching, where students apply to at most one college, and colleges accept students of their choice within a quota, or defer them to general admission or reject them. In the second phase, it is a many-to-one regular matching as students apply to many colleges and may accept only one positive college decision. The schools can then choose which strategy to adopt in terms of admission policy.

It turns out that early decision is the preferred policy for colleges: students can apply at most to one college in the Fall, before general admission, and have to commit to attend if admitted. Colleges want to attract their preferred students, presumably the best students who themselves want to go to the best colleges. To avoid admitting inferior students, they seek commitment from applicants. This, however, benefits colleges more than students, as colleges have a first mover advantage by selecting the admission procedure. Interestingly, Harvard has decided recently to scrap its early admission program, officially to give a better chance ot lower income students. But the real reason is probably that Harvard believes it is a first choice among applicants anyway, so it does not need to coax them into a commitment, as long as other alite colleges follow suit, which seems to be happening despite the fact that it is against their interest.

Wednesday, March 18, 2009

It is well known that there is a strong correlation between the income of parents and that of their offspring. The same applies to cognitive skills and to measure of IQ. The big question is whether this is due to genes or the environment. One more addition to this literature is based on the German Socio-Economic Panel, a large and incredibly rich panel that has measures of IQ along with plenty of other socio-demographic characteristics.

Silke Anger and Guido Heineck show that genes are certainly not the only ones responsible for this correlation, but they are part of the story. Interestingly, this study can differentiate between two types of cognitive abilities: cognitive speed, which is supposed to be independent from the environment, and verbal fluency, which is acquired. It finds that mothers matter more than fathers (no surprise), that there is an own-gender effect in the transmission of language skills, and there is stronger intergenerational transmission of verbal fluency that cognitive speed.

What all this means is that without help from the government, the development of cognitive skills is likely to be inefficient. As a society, you would want the innately brightest children to benefit the most from school to enhance the total quantity of human capital. But this is very elitist and may not satisfy fairness or some egalitarian goals. If the goal were to give everyone the same IQ, state intervention would be necessary to counteract the naturally occurring positive correlation. The trouble is that societies have difficulties establishing what their actual goals are: efficiency or fairness.

Tuesday, March 17, 2009

When it comes to publication, economists set incredibly high standards. Compared to other fields, rejection rates are higher, editors and especially referees have a much higher impact, papers go through multiple revisions within the same submission (and may still be rejected), papers are expected to be self-contained pieces, and everything needs to be perfect, including grammar. All this leads to the well-lamented huge publication delays in Economics. Yet, publication in the top journals is still a requirement for tenure in any department that wishes to garner any respect, and it is just not possible for top journals to publish all the research fit for tenure.

Bruno Frey calls this the "Publication Impossibility Theorem System" (PITS): there just not enough slots in those journals, especially once one considers that 80% of the articles in the top five journals are written by faculty based in the US. Frey claims that this makes it impossible for non-Americans. Whether there is a US bias remains to be established, but even for Americans, the bottleneck is clearly present.

That said, this brings up more generally the question of publication expectations for tenure and promotion, and the journal culture in Economics. Over the last two decades, a large number of journals have been created, partly because commercial publishers saw opportunities, but mostly because the top, society driven journals failed to realize that the publishing needs of the profession have increased. It is only very recently that the American Economic association has realized that it missed the boat and created its four new American Economic Journals. The econometric Society as well announced the creation of two "field journals", Empirical Economics and the preexisting Theoretical Economics.

This should provide only little relief, as these add-on journals are unlikely to be considered top-journals. In fact they seem to turn into junk mail lying around everywhere in department mail rooms. What is really needed is to write shorter papers, straight to the point with less emphasis on the referees. More papers will then be published faster, and let citations then do the measurement of quality. The latter are a very imperfect measure nowadays, because the excessive lengths of papers allows to cite each and everyone. A shorter paper will have to be more selective and restrict itself on those that it really builds upon.

Monday, March 16, 2009

The last two or three decades of research in macroeconomics are currently under attack, under the assumption that current research has nothing to say. In particular, the agenda of putting microfoundations in macroeconomics is criticized. Sergio Da Silva goes even as far as to claim that microeconomics need further microfoundations from neuroeconomics more than macroeconomics does. The argument is that even with microfoundations, the Lucas critique still applies (which may be true, if one is a purist, it will always apply), that first principles are not policy invariant (purism again), New-Keynesian models are not well-founded (I agree, but they are a subset of macro), first principles are shaky (there are always exceptions, but for aggregate purposes, they are solid), and micro units are irrelevant because they do not aggregate to a representative agent (but there is also a significant literature in macro with heterogeneous agents, as recently surveyed by Jonathan Heathcote, Kjetil Storesletten and Giovanni Violante. Da Silva recommends to turn to biology for microfoundations and physics for aggregation.

This is very misguided. While I can see the point of understanding preference formation, and I have made the point earlier, cutting back on microfoundations in macroeconomics to replace it with statistical fitting is a serious mistake. Abandoning first principles would bring us back to reduced-form macro, where models were fitted to the data but had little to say in terms of impacts of policy (see Lucas Critique). The current crisis, because it is unprecedented, needs to be studied with microfoundations, so that one can understand how policy will change people's behavior and how this aggregates up. One needs strong theory, not strong empirics, to study counterfactuals in an environment where history is of little help. In fact, microfoundations have recently helped us understand the various policy blunders that followed the Crash of 1929 and led to the Great Depression.

Friday, March 13, 2009

The Mortensen-Pissarides matching function has been a standard ingredient of any labor market model interested in the transition in and out of unemployment. It is easy to use, appears to have the right properties, and can be founded on microfeatures, as documented by Ricardo Lagos. The use of the matching function in business cycle models has, however, recently come under assault following the work of Robert Shimer because these models to not yield some key properties of labor market transitions during the business cycles. Is it time to rethink such reduced forms, as the matching function ultimately is?

Melvyn Coles and Barbara Petrongolo go back to the roots and note that the matching function essentially assumes that there is a single bin of unemployeds that are potentially matched with vacancies. In reality, we need to think about two bins: the first is the newly unemployeds, who scan all available vacancies and may match quickly, and the second is the previously unemployeds, who scan only the new vacancies, having already looked at the old vacancies. One should therefore not confuse stocks and flows. The question here is whether the confusion is empirically relevant or not. Coles and Petrongolo find that the matching function is still OK in steady state, but it indeed stumbles on the labor market transition facts Shimer highlighted. Time to rethink those business cycle models.

Thursday, March 12, 2009

Renewable energy, and in particular solar energy, is not yet as efficient as the generation of energy from exhaustible sources, such as oil, gas and coal. Yet, because the latter will at some point be exhausted, a switch from the latter to the former will have to happen at some point. Some want to encourage this now, none the least because of the pollution aspect of exhaustible resources, and I have argued before that such encouragement should happen by taxing 'bad' energy instead of subsidizing 'good' energy.

Now imagine that switching is costly, but that switching brings us into a regime where the quality of life grows faster. Then one would not want to switch when the two energy sources are equally efficient, but rather earlier. The main reason is that one wants to exploit the additional growth effect. This is essentially the argument of Simone Valente in a recent paper, using an endogenous growth model.

Of course, this result hinges on the fact that renewable energy leads to stronger growth. As non-renewable energy sources become more scarce, their price increases. But this price is capped by the price of renewable energy. This means that once the price of energy does not increase anymore, or even declines as this renewable energy becomes more efficient, growth can rely more on energy again and not build down energy use due to its scarcity.

Wednesday, March 11, 2009

Terrorism has come to the forefront over the last decade, in particular with suicide missions. Suicide bombers seem to defy logic and rationality, in particular, they are surprisingly educated. In the face of this problem, there have been essentially two approaches. The first one, which I would call the US-Israel option, is combat violence with violence. The second one, call it European, is to make suicide less worthy by helping the relevant areas to develop. None seems to be particularly fruitful, none the least because they contradict each other and are both applied to the same areas.

In a pair of papers, Karen Pittel and Dirk Rübbelke try to understand the logic of suicide bombers and consequently how to address terrorism. Essentially, they show that the decision to kill yourself in a terrorist act may likely involve limited information and time inconsistency. Terrorists are rational, it is simply that their perception of reality is twisted by isolation and propaganda. Time inconsistency is apparent when a bomber chickens out of a terrorist act, although it may be consistent under some circumstances to announce an act and not execute it. This should be exploited.

The policy option are then to offer non-monetary alternatives to suicide bombing, like providing other opportunities for personal development (a job, emancipation), as well as reducing the information bias, that is, propaganda. The European approach mentioned above seems thus more promising. While the American approach clearly offers a deterrent as it reduces the pay-offs to surviving family, it does not help with providing positive alternatives and in particular getting out of despair. And it does not help in propaganda and aleviating information biases.

Tuesday, March 10, 2009

It has become difficult to make much sense of the business cycle lately.The first puzzle was the so-called Great Moderation, as somehow business cycle fluctuations across the world became more dampened over the last two decades or so. The second one is what we are currently witnessing. Add to this a curious phenomenon that Natasha Xingyuan Che is documenting: while aggregate volatility was reduced during the Great Moderation, idiosyntract volatility (at the firm level) was actually higher. This is an indication that aggregate volatility changes were not just the consequence of a general change in volatility, but rather that the way the economy is organized has changed.

Che verifies this conjecture both empirically and using a model where organizational capital is crucial. Indeed, this intangible capital creates considerable idiosyncratic risk, but it also considerable reduces the comovement between firms. By definition, organizational capital is firm specific, basically whatever would give a firm value above the tangibles. Count in a customer base, work morale, reputation, "how to do things", etc. So, this capital seems quite independent of other firms, one can even argue that it creates a negative comovement with other firms: if, say, a firm gets a negative reputation shock, it lowers its sales and the competitors pick up a larger share of total demand.

Monday, March 9, 2009

Much is made about lead papers in journals. Some editors like to put what they think is the best article of a review in front. Is there any truth that this signals quality? Tom Coupé, Victor Ginsburgh and Abdul Noury use a natural experiment to test this idea: The order of articles in European Economic Review was alphabetical by author in some issues from 1975 to 1995. One can accept that this is a random ordering on the quality dimension.

The results are sobering. It turns out papers appearing first do have a citation advantage. This means that at least part of the citation advantage of lead papers is due to their position, not their quality. And knowing how the alphabet ranking of your name matters, it appears latter authors were doubly screwed in the European Economic Review.

Friday, March 6, 2009

What can explain the persistent differences in development acorss the world? While the dispersion of income has increase with the Industrial Revolution, it was already very high before that. Some have claimed that the timing of the transition for hunting and gathering to agriculture during the Neolithic Revolution is crucial, in other words the luck of geography is determinant. But maybe genes are more important.

This is what Oded Galor and Quamrul Ashraf claim. Specifically, they say that genetic diversity within a population can have important effects on the development of an economy. On the one hand, genetic diversity leads to lower social cohesion, and therefore mistrust and coordination failures, which leads to a depressed economy. On the other hand, genetic diversity allows to exploit complementarities and thus increase (faster) total factor productivity. Thus the impact of geeneti diversity is ambiguous.

The empirical analysis reveals that diversity is beneficial at low levels of diversity, and detrimental at high levels. This analysis was performed using expected heterozygosity at the ethnicity level: what is the likelihood that two random people form the same ethnicity would share genes. In this, distance from East Africa, following the migration patterns of early humans, proves particularly useful.

Looking at data for AD 1 to 1500, where economic development can be somewhat reliably be measured by population density (this was a Malthusian world after all), the authors claims that between 15% and 42% of economic development dispersion across the world can be explained by genetic diversity. Surely not negligible. And intriguing.

Thursday, March 5, 2009

A major part of the American Dream is home ownership and this dream is heavily supported by public policy through mortgage rate tax deductability, support for first time buyers, other tax advantages, and recent bailouts. So why do we have all this support for home owners? Does ownership make people happier? Does it make a better society? Yes in both cases according to popular belief, but is this actually true?

Grace Wong Bucchianeri addresses these questions using a survey conducted in Franklin County, Ohio. This survey has time use data, include various measures of happiness throughout a sample day for women in rented or owned single houses. Along with all sorts of other controls, the focus here is to determine whether home owners are different from renters. And the results are:

Happiness: home owners are not happier in any dimension. In fact, they appear to suffer more pain from house and home than renters.

Self-esteem: no difference between ownership categories.

Health: home owners are less satisfied about their health, and for a good reason: they a fatter, for an average of twelve pounds.

Time use: home owners have less leisure, spend less time friends, and like it less when they do.

Relationship: home owners are less happy with their partner, and with other people in general.

Participation in civic activities: no differences.

Neighborhood: home owners suffer less pain from their neighborhood. Finally a positive...

Wednesday, March 4, 2009

I have reported before about what a rip-off textbooks are. The obvious solution is to teach without one, but today's students insist on them. But help seems to appear on the horizon, in the from of Flat World Knowledge, a commercial publisher that sells hard copies, at lower prices than the competition, and offer the PDF files for free. This is quite an interesting commercial strategy, which has also been adopted by some open access journals that provide print-on-demand services at some cost but otherwise keep the journal free. In economics, Theoretical Economics comes to mind.

Tuesday, March 3, 2009

It is not a good year to go on the job market for US Economics PhDs. Most state schools are not hiring, and the financial sector is dead. Regarding private schools, those with larger endowments are still hiring, though moderately. Those with smaller endowments are scared to hire as they do not know yet how many students will show up in the Fall.

Bad years can happen, the question is what comes next. I have the strong suspicion that there will be many last minute visiting positions, especially among the smaller private schools. Those positions, if they happen, may convert to tenure-track next year. State schools will, however, not hire next year, even if the economy improves. Next year's cohort of PhDs will join this year's backlog chasing few positions. The excess supply of PhDs will persist for several years, as we have seen after the previous recessions.

There is little prospect of significant absorption of the excess supply abroad. The only hope is the government sector, which is supposed to increase its regulatory oversight and plenty of projects to launch. This could also mean more jobs with consultants, but those have not materialized yet.

Monday, March 2, 2009

There is good evidence, foremost by Eric (corrected: Frank) Lichtenberg, that the introduction of new drugs improves health outcomes. But at the same time, there is a perception that new drugs increase health care costs, and maybe so more than it improves lives.

Rexford Santerre dismisses this idea showing that new drugs even reduce medical costs, primarily by making medical procedures less necessary. The empirical analysis is performed using aggregate data by health category, by regressing the change in expenditures on the previous year's change, the change in income and the number of new drugs. I find it heroic to make claims on causation based on such a "model". All you have is a correlation after controlling for income. If you want to say anything about causation, write down a proper model with testable hypotheses, and test those, not some random equation.

Another point where I think this paper misses the mark is in the presumption that drug price controls would be bad. The pharmaceutical industry enjoys some of the highest returns thanks to the protection given by patents. These firms need to be regulated for that very reason. In fact, it would be better to drop the patenting system in the first place: this would increase the competition to be ahead of competitors, instead of hampering progress with strategic patenting. Also, drug prices would be much lower.